2.1.1 Economic growth Flashcards
Economic growth
Economic growth is the rate of change of output. It is an increase in the long term productive potential of the country which means there is an increase in the amount of goods and services that a country produces.
● This is typically measured by the percentage change in real GDP per annum. It can also be shown through the shift of PPF.
Gross Domestic Product (GDP)
The standard measure of output, which allows us to compare countries. It is the total value of goods and services produced in a country within a year.
- an indicator of the standard of living in a country
Real vs Nominal GDP
Real GDP strips out the effects of inflation whilst nominal GDP does not.
(Nominal GDP includes effects of inflation)
Total GDP vs per Capita
Total GDP represents the overall GDP for the country whilst GDP per capita is the total GDP divided by the number of people in a country.
- GDP per capita grows if national output grows faster than population over a given time period, so there are more goods and services to enjoy per person.
Value vs Volume
Real values can be described as the volume of national income i.e. the size of the basket of goods, whilst nominal values represent the value of the national income i.e. the monetary cost of this basket of goods. The value is equal to the volume times the current price level. The value of national income is its monetary value at the prices of the day; the volume is national income adjusted for inflation and is expressed either as index number or in money terms.
Gross National Income GNI
The value of goods and services produced by a country over a period of time plus net overseas interest payments and dividends. This means that it adds what a country earns from overseas investments and subtracts what foreigners earn in a country and send back home from the GDP. It is affected by profits from businesses owned overseas and remittances sent home by migrant workers. This is increasingly used rather than GDP because of the growing size of remittances and aid.
Gross National Product **
The value of goods and services over a period of time through labour or property supplied by citizens of a country both domestically (GDP) and overseas. This means it is the value of all the goods produced by citizens of a country, whether they live in the country or not, whilst GDP is the value of all goods produced inside the country, whether they were produced by citizens of the country or not.
Comparisons about growth: over time
Over time: Changing national income levels will show us whether the country has grown or shrunk over a period of time.
o The data is compared to other countries to put figures in a context. Growth figures over a set period of time can be compared against similar countries to see whether the country has done well or not.
o The figures can also make judgements about economic welfare as growth in national income means a rise in living standards as the economy is producing more goods and services so people have access to more things.
o It is important to use real, per capita figures. If a country’s population grows over time, then this may cause a rise in GDP without a rise in living standards and so provide inaccurate comparisons. We use real GDP in order to strip out the effect of inflation. Inflation is rising prices and therefore can give the impression of GDP growing without any more services and goods being produced.
Making comparisons about growth: between countries
When countries have a difference in population, a difference in total GDP doesn’t necessarily mean a difference in living standards so to make comparisons, we work out GDP per capita. It is possible for GDP to increase simply because of an increase in prices in the country and inflation is different in every country, so real GDP figures need to be calculated.
Purchasing Power Parities PPP
An exchange rate of one currency for another which compares how much a typical
basket of goods in the country costs compared to one in another country.
They provide an alternative to using exchange rates for comparisons of GDP.
Use of PPP adjusted figures in international comparisons
Purchasing power parities are useful when comparing countries as it takes into account the cost of living (how much has to be spent to maintain living standards), and so will help us better compare living standards.
● The difference between the highest and lowest GDPs will be smaller when PPP is used as poorer countries have a much lower cost of living than richer ones. For example, in Kenya £2 a day in their own currency is enough to survive on, whilst it isn’t in the UK.
● One example of this is the Big Mac Index, comparing the cost of the Big Mac throughout the world.
Problems of using GDP to compare the standard of living
National income statistics can be used to compare between countries and overtime to give some indication of the relative living standards: the quality of life enjoyed by people in a country. However, there can be problems with this:
- Inaccuracy of data
- Inequalities
- Quality of goods and services
- Comparing different currencies
- Spending
- Other
Inaccuracy of data: problems of GDP to compare standard of living
o Some countries are inefficient at collecting or calculating data and therefore comparisons can become less effective.
o There is a ‘hidden’ or ‘black’ market in which people work without declaring their income to avoid tax or to continue claiming benefits, and so GDP is underestimated because these incomes aren’t taken into account. This varies hugely between countries and may change overtime.
o GDP does not take into account home-produced services, for example in many poorer countries people work as subsistence farmers where they grow and consume their own crops without trading, and so the GDP is underestimated. This can also be true in the UK where DIY or the service of house-wives/husbands are not recorded.
o Errors in calculating the inflation rate means real GDP will be slightly inaccurate.
o Over time, methods used to calculate GDP will change and so therefore it can be difficult to compare countries overtime. Similarly, different countries may use different methods to calculate their GDP.
o Also, it is important to take away transfer payments, when money is paid to a person without any corresponding increase in output in the economy. For example, the government taxes people who are employed and then gives it straight to the people who are unemployed. Other examples include pocket money and the selling of second hand goods.
Inequalities: problems of GDP to compare living standard
An increase in GDP may be due to a growth in income of just one group of people and so therefore a growth in the national income may not increase living standards everywhere. Income distribution changes overtime and varies between countries so makes comparisons difficult.
Quality of goods and services: problems of GDP to compare living standards
The quality of goods and services is much higher than those fifty years ago, but this is not necessarily reflected in the real price of these goods and services. Therefore, living standards may have increased more than GDP would suggest since the quality of goods and services has improved greatly. Improved technology may allow prices to fall, suggesting falling living standards, when this is not the case.
